Your Retirement Savings and Change in Employment

Whether you leave an employer for a wonderful new opportunity or lose a position because of the pandemic, it’s easy to forget about the money you have saved in your retirement plan.

Sometimes, retirement plan savings can stay in a previous employer’s plan. Other times, your money can’t stay in the plan, and you need to take action or your employer may move your money. The circumstances depend on the type of plan the employer offers and the amount of money you have in your account.

What if my money is in a 401(k) plan?

The rules for distributions vary from plan to plan. If your old employer offered a 401(k) plan, then you may have several choices:

      1. Rollover your savings. Plan participants can rollover the money from an old employer’s plan into an Individual Retirement Account (IRA) or a new employer’s plan. There are some good reasons to choose a rollover. For instance:
        • There are no penalty taxes. When you choose to rollover savings directly (meaning you never receive the money) from one retirement plan into an IRA or another 401(k), there are no penalty taxes. All of your money keeps working for you with tax advantages.1
        • It’s easier to keep track. Many people change jobs every few years. Moving retirement savings from previous employers’ plans into one account can simplify things. You know where the money is, you know how it’s invested, and you can easily rebalance investments or make other changes.
        • There’s less administrative work. Even if you choose paperless options, having multiple retirement accounts means tracking more tax documents, remembering more passwords, and updating more accounts when your address or personal information changes. Consolidating your assets can simplify things.

When deciding whether an IRA or a new employer’s plan is the right choice for a rollover, it’s important to compare investment options and fees.

      1.   Withdraw your savings. Plan participants can withdraw their retirement savings when they leave an employer or change jobs. The catch is, if you take a withdrawal before age 59½, you may lose as much as half of your savings to income and penalty taxes.2

Once you receive a check, you can rollover your savings into an IRA or a new retirement plan. However, if income taxes have been withheld – employers usually withhold 20 percent for income taxes – you’ll have to make up the difference to complete the rollover and avoid all income and penalty taxes.2

The CARES Act created special rules for withdrawals taken during 2020. If your plan adopted the new rules, you may be able to take a penalty-free distribution before age 59½.3 If you would like to learn more about CARES Act provisions, including whether you qualify for a CARES Act withdrawal, please get in touch.

      1.   Do nothing. The reality is financial decisions often inspire inertia. It’s easier to do nothing than to gather the information needed to make a confident decision. As a result, many people leave their retirement savings in former employers’ plans.

That’s okay if you have more than $5,000 in your plan account. However, if you have less than that amount, your employer may have the right to take action and move the money out of the plan:1

        • If you have less than $1,000 in your account, the plan may send you a check with 20 percent withheld for income taxes. The penalties and rollover options are similar to those you have when savings are withdrawn.
        • If you have between $1,000 and $5,000, the employer may automatically rollover your savings into an IRA offered through a provider selected by the plan sponsor.

While it can be tempting to do nothing, when it comes to retirement plan savings, it’s better to take time, consider your options, and make a choice that suits your needs.

What if my money is in a SIMPLE or SEP IRA plan?

Smaller businesses have been particularly vulnerable to pandemic disruption. Often small businesses offer different types of retirement plans, such as Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA plans. The options are similar to those of 401(k) plans, but there are significant differences. For instance, plan participants can take withdrawals from SIMPLE and SEP IRAs at any time. Withdrawals may be taxed as ordinary income and subject to penalty taxes if the participant is younger than age 59½:4

    1.   SIMPLE IRAs have a two-year holding period. SIMPLE plan options are similar to 401(k) plan options. Plan participants, typically, can leave money in the plan, take a withdrawal, or rollover their savings. For withdrawals and rollovers into accounts other than another SIMPLE IRA:5
      • If your money has been in the SIMPLE IRA for two or more years, income taxes may be withheld and a 10 percent penalty tax may be owed, depending on your age.
      • If your money has been in the plan for less than two years, a 25 percent early distribution penalty may be assessed.
    1.   SEP IRA plan rules mirror those of traditional IRAs. Plan participants, typically, can:4
      • Rollover savings directly into another type of IRA to avoid penalty taxes and keep tax advantages.
      • Take a withdrawal, although any money withdrawn before age 59½ is subject to income and penalty taxes. After a withdrawal, the participant has 60 days to rollover the money (including any money withheld for income taxes) into a new retirement plan option.
      • Leave the money in the SEP IRA.

The rules governing retirement plans can be complex. Before making any changes to your retirement plan accounts, talk with your tax and financial professionals.

Sources:

1 https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

2 https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-rollovers

3 https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#toc-H638004C502804947B4CFB9B4B770C2F2 (Section 2103)

4 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

5 https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-distributions

5 Charts We Are Watching

Market Blog

There are many charts that caught our attention this week, and today we share the top 5 charts we’re watching.

The S&P 500 Index recently had a four-week losing streak and fell nearly 10% along the way, while the Nasdaq and many large-cap tech stocks fell even more. Then in a big move higher over the past two weeks, many stocks moved from oversold to overbought in a very quick timeframe.

As the LPL Chart of the Day shows, more than 90% of the components in the S&P 500 were beneath their 10-day moving average on September 24 and within two weeks saw more than 90% above this short-term trend line. This type of buying thrust is consistent with future strong returns, suggests quick reversals from oversold to overbought are a good thing and could bode well for stocks to outperform bonds well into 2021.

View enlarged chart.

Parts of the economy are opening back up, while employment continues to disappoint. One specific area that continues to improve is how many people are flying, as the seven-day average number of travelers going through Transportation Security Administration (TSA) checkpoints hit a new recovery high. We discuss other high-frequency data points in our COVID Surge Stalling Europe’s Recovery blog.

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We’ve noted before that stock market gains ahead of the election historically support the incumbent party, while if stocks are lower it tends to support new leadership in the White House. Taking this further, the US dollar also tends to send signals for who might win. In fact, when stocks are up and the US dollar is lower ahead of the election, or if stocks are lower and the US dollar is higher before an election, the results have accurately predicted the last seven times those scenarios took place. Given stocks are up and the US dollar is slightly lower, this could be one clue the upcoming election will be much closer than many are expecting.

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Sticking with the election, many investors are worried about higher taxes and more deregulation if former Vice President Joe Biden wins. “Higher taxes may be one part of it, but Biden is also looking at huge spending initiatives,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Stock markets like spending, and this could more than help offset potentially higher taxes.” Lower tariffs could potentially provide another offset as well.

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Last, Friday’s retail sales report came in better than expected, marking five consecutive months of year-over-year gains. It is worth noting the economy has never been in a recession after 4 or more consecutive monthly gains. Still, in the face of one of the most severe recessions ever, it took only a few months for sales to get back to new highs, as shown below. Historically, new highs in retail sales happen in expansions—and this is yet another clue the recession is likely over.

View enlarged chart.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

Being Financially Savvy is A Family Business

Being Financially Savvy is A Family Business

Like it or not, we’re all involved in running the “family business.” We worry that our parents might outlive their retirement savings, we are worried about our kids going to college, and what our own role in both might be. We’re often comforted by the thought that family members would probably bail us out if we got into money or personal trouble. We strive to help our children financially, and we’d like to bequeath them at least part of our nest egg. Families in the United States are an important part of the social construct. Families care for one another.

In short, our family is our asset, liability, and legacy. Now here’s the contention: It’s time to build this notion into the way we manage our money. Many people are willing to help their family members out financially, so we should recognize this, not just ignore it.

Here are just some of the reasons why:

Raising Children: Parents do have a legal responsibility to care for their children. If you are fortunate enough, you might want to continue this financial support into college years and beyond. However, that can be a drain on your own wealth and perhaps even hinder your retirement savings.

If you don’t want your adult children swimming in credit card debt, missing mortgage payments, and constantly asking you for money, start by teaching your children financial literacy and best practices at a young age. This is how most people learn about money. Try your best to instill in them positive financial behaviors from a young age. Even if you are not born into wealth, you can teach financial literacy to your children.

That’s trickier than it seems. Children can grow up sheltered from the money talks at home, only seeing spending and not earning, budgeting, and saving. After all, for children, all purchases are free, so why should they fret about the price tag or control their desires? Instead, teach children the basics of money, about earning money, and the importance of saving.

One way to do this is to make your children feel like they’re spending their own money. Give them an allowance when they are younger based on doing chores, and a clothing allowance when they are teenagers and insist they live within this budget. This way, instead of you constantly saying “no” to your children, they will learn to say “no” to themselves. They will also learn the benefits of positive spending habits.

Launching Adults: Once your children get into the workforce, you want them to get into the saving and investing portion of their financial life cycle where they are steadily building wealth. However, if they do not understand debt, they can fall behind quickly and struggle to ever catch back up.

It is also important to discuss student loans and credit cards with your young adult children. These types of easy access funds can quickly have a snowball effect, because the young adult can quickly borrow and push off the pain of repayment into the future.

If your young adult children can start down a positive financial path early on, the easier it will be for them to meet their goals and less of a financial drain on you. To that end, encourage your children with your words and with your fine example. We don’t have a duty to just support our kids financially, but to teach them how to be financially independent later in life. This starts with the basics of financial literacy.

Third Quarter Market Review – What Worked?

Stocks fared well during the third quarter despite September’s weakness, with the S&P 500 Index returning about 9%. The quarterly gain brought the return through the first nine months of the year to 5.6%. Here we peel back the onion on the third quarter’s stock performance to look at what worked and what didn’t.

Growth beat value for the quarter despite losing ground in September. The growth style of investing continued its impressive 2020 run during the quarter, shown in the LPL Chart of the Day, but underperformed during September as markets pulled back and rotated some from the winners to the laggards. Value’s outperformance for the month was its first such feat in 12 months, based on the Russell 1000 style indexes. Over the full quarter, growth got a boost from strong gains in technology, while value was hurt by weakness in the energy sector.

View enlarged chart.

“The improving performance of cyclical value stocks in September suggests markets may be increasingly pricing in a durable economic expansion,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “We’re sticking with growth, but as more progress is made on vaccine candidates, value could make a run.”

Small caps held up slightly better than large caps during September but lagged for the quarter. As the US economy transitions from recession to a new expansion, we would expect small caps to do well as traditionally strong early-cycle performers. They did well coming off the March 2020 lows, but performance has leveled off in recent months due to the strength in large cap technology and other stay-at-home stocks.

Strong quarter for emerging markets. Looking at regions, emerging markets stocks outperformed the United States during the third quarter with its 9.7% return, based on the MSCI Emerging Markets (EM) index. EM outperformance was driven by China, South Korea, and Taiwan, as China led the way out of the global pandemic and its technology-driven trading partners in Asia thrived. Developed international stocks lagged during the quarter, based on the MSCI EAFE Index, due to weakness in France and the United Kingdom. Over the first nine months of 2020, emerging markets edged 0.9% lower, while developed international stocks lost 6.7%.

Consumer discretionary topped all equity sectors for the quarter. Gains were broad-based, though homebuilders stood out with outsized gains as the housing market remains quite strong. The internet retailers lagged slightly behind the sector as some of the pandemic winners took a breather late in the quarter. Energy struggled mightily with a nearly 20% decline even though oil and natural gas prices rose, bringing the sector’s 2020 loss to 48% through September 30.

View enlarged chart.

LPL Advisors: For more on recent winners and losers and what asset classes and sectors LPL Research favors heading into the election, look for our Global Portfolio Strategy report October 9.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

Three Market Takeaways from the First Presidential Debate

The first presidential debate is now in the books, with two more (maybe) ahead and a vice presidential debate on October 7. The debate was raucous, occasionally uncouth, and more than a little surreal for viewers at home. But did anything happen that could potentially move markets? Probably not.

“Despite the chaos, viewers probably came out of the debate with largely the same impression of the candidates they came in with,” said LPL Financial Chief Market Strategist Ryan Detrick. “We expect markets will likely take a similar view.”

In our How Stocks Do Around The First Debate blog, we looked at market behavior in the days and weeks after first presidential debates in the past. Results have been all over the place, but on average the S&P 500 has been flattish and a little below the long-term average. That fits with several election patterns. Historically, the challenger, on average, has been viewed as the stronger performer in the first debate. At the same time, stocks tend to underperform leading up to a presidential election when the challenger ends up unseating the incumbent, although they tend to advance post-election no matter who wins. Put those together and it implies potential modest market weakness, or at least a lack of strength, after the first debate. However, the effect is likely temporary since debate bumps don’t usually persist. There’s also some impact from normal  September and October seasonal weakness, which may be in play around the time of the first debate.

What did we actually see in the first debate from a market perspective? There were three key things we were following to gauge the likelihood of a market reaction:

      • Were there any changes in our understanding of the candidates’ respective policies?

The answer here is a resounding no. There was a lot of noise around how the candidates tried to portray each others’ policies, and there were actually some meaningful points buried in all the rancor, but we didn’t learn anything new.

      • Will the election odds shift?

Rather than looking at who “won” the debate, it makes more sense to look at the debate from the perspective of what each candidate needed to accomplish. While we believe the election odds remain closer than the polls indicate, former Vice President Joe Biden does appear to maintain a small edge, even with President Donald Trump’s apparent structural advantage in the electoral college relative to the popular vote that we saw in 2016. Trump probably needed to make up some ground in the debate. Biden needed to hold serve. The president’s goal for the debate was more challenging, especially in the face of historically steady polling and a “divided and decided” electorate. And with five weeks to go until Election Day and voting already taking place in several states, the need to make inroads is becoming increasingly pressing. No matter how you choose to call the debate, it probably did little to change minds in either direction. From that perspective, last night appears to be a lost opportunity for the president. The market’s likely interpretation of all this? No change.

      • Has the perceived possibility of a chaotic election outcome increased?

Markets don’t unlike uncertainty, and they could be rattled, at least temporarily, by an uncertain election outcome or legal battle. There was no clear market indication overnight that election uncertainty increased, but we’re going to give this one a maybe. We’ll tackle the potential for an uncertain election outcome and what it may mean for markets in greater detail in LPL Research’s Weekly Market Commentary next week. We continue to think that a meaningfully contested outcome is unlikely, but as has been the case over recent weeks, the president continued to express skepticism about the legitimacy of the outcome under current procedures and last night he once again raised the possibility of mounting a legal challenge. It’s worth noting that legal challenges to a close election have been raised by both sides—by Republicans in 1960 and by Democrats in 2000. The idea of challenging a close election itself is not the same as challenging the legitamacy of the process. But the rhetoric has been escalating. We still believe that the remarks are more part of the president’s pre-election strategy than post-election intentions, but they may still add to perception of uncertainty, which will be an added factor to monitor as Election Day nears.

The next debate is between the vice presidential candidates. Presidential debates historically have not had a large impact on elections, and vice-presidential debates scarcely any at all. This one could be different. Either presidential candidates would be the oldest in U.S. history on inauguration day if elected (Trump would be 74 and Biden 78) and the vice-presidential candidates may try to strike a more civil tone, opening up the possibility of a more substantive policy debate. But as for last night, despite all the fireworks, we believe that markets will be unmoved.

Give Yourself a Tax Advantage

If your income is pie, then the federal government takes a hefty slice each year. A 2020 report from the Tax Foundation found a single average wage earner in the United States pays about 29.8 percent of their income in federal taxes. That’s about $18,368 in federal taxes and does not include state and local taxes. The calculations include:1

    • Income tax 1 percent
    • Employee paid payroll taxes 1 percent
    • Employer-paid payroll taxes* 6 percent

Payroll taxes fund Social Security and Medicare.

If you would like to keep more of your income, tax-advantaged accounts can help. The category includes retirement, health, and education savings accounts, as well as savings accounts for people with disabilities. Here are a few you may want to learn more about:

    • Individual Retirement Accounts. Better known as IRAs, these accounts provide Americans with opportunities to reduce taxes while saving for retirement. There are different types of IRAs, including:2
      • Traditional IRAs. For instance, if you open and save in a Traditional IRA, your contributions may help reduce your taxes today. In addition, any earnings grow tax-deferred until you begin to take distributions which are typically taxed as ordinary income.
      • Roth IRAs. Alternatively, you could open and save in a Roth IRA. Roth IRAs don’t offer a current tax break. Contributions are taxed. However, distributions are tax-free, as long as certain conditions are met. In the meantime, any earnings grow tax-deferred.  Not everyone can contribute to a Roth IRA. There are income limits that determine whether an individual or a household can make Roth contributions.
      • Rollover IRAs. If you have saved money in an employer’s workplace retirement plan and you retire or change employers, you may decide to rollover the savings into a Traditional or Roth IRA. A direct rollover from a workplace plan to a rollover IRA allows you to avoid taxes and keep your savings growing tax-deferred.

No matter what type of IRA you choose, the tax advantages allow you to keep more of your money invested and compounding, so your savings can grow more quickly than it might in a taxable account.

In 2020, anyone with earned income can contribute up to $6,000 to an IRA. If you’re over age 50, you can contribute an additional $1,000 for the year. While it’s possible to contribute to multiple IRAs, the maximum combined contribution cannot exceed these limits.3

  • Workplace retirement savings plans. Your employer may make it possible for you to save in a qualified retirement plan such as a 401(k), 403(b), SIMPLE, or SEP IRA plan.

Contributions made to these plans offer tax-advantages that may include tax-deductions today or tax-free income tomorrow, in addition to tax-deferred growth of any earnings.4

In general, you can contribute far more to a workplace plan than you can to an IRA. For example, in 2020, the maximum annual contribution to a:

    • 401(k) plan is $19,500. Employees who are age 50 or older can save an additional $6,500.5
    • 403(b) plan is $19,500. Employees who are age 50 or older can save an additional $6,500.5
    • SIMPLE IRA plan is $13,500. Employees who are age 50 or older can save an additional $3,000.6
    • SEP IRA plan is 25 percent of compensation, up to $57,000.7

Some employers match employee contributions. So, when an employee contributes to the plan, the employer contributes, too. Tax-advantages can help you save more than you might otherwise.4

  • Health savings accounts. Healthcare is likely to be a significant expense in retirement for most Americans. Fidelity estimated a 65-year old couple retiring in 2020 will need approximately $295,000 to pay for healthcare and medical expenses during retirement.8

Health Savings Accounts, also known as HSAs, offer a tax-advantaged way to pay for healthcare expenses today and save for future healthcare costs. Don’t confuse HSAs with Flexible Spending Accounts (FSAs). Typically, money in an FSA must be used during the plan year or it is lost. Any money saved in an HSA is yours forever.9, 10

Anyone enrolled in a high-deductible health insurance plan can save in an HSA. Some employers offer HSA accounts, others do not. If an employer doesn’t offer an HSA, you can open one on your own. You can save in an HSA until age 65, even if you are not working.10

HSAs offer a triple tax advantage:10

    1. Contributions are pre-tax if they are made through payroll deductions or tax-deductible if you contribute to an account you open. Either way, they provide a tax break today.
    2. Any earnings grow tax-deferred so the accounts have the potential to grow faster than taxable accounts.
    3. Distributions taken to pay qualified medical expenses are tax-free.

In general, individuals with single coverage through a qualifying high-deductible health plan can contribute up to $3,550 in 2020. A household with family coverage may contribute up to $7,100. Anyone age 55 or older can contribute an additional $1,000 in catch-up contributions during 2020.10

  • Education savings plans. Another way to reduce taxes is to save elementary, secondary, or college expenses in a 529 college savings plan. Typically, 529 plans are offered by states and offer a variety of tax incentives, including:11
    • Current tax deductions. Contributions to 529 plans are not federally tax-deductible, but they often are state tax deductible for state residents.
    • Tax-deferred growth of any earnings in 529 plan accounts.
    • Tax-free distributions when used to pay qualified education expenses.

Anyone can contribute to a 529 plan – parents, grandparents, family, friends – and there are no annual contribution limits. That said, contributions to 529 plans are considered to be completed gifts for federal tax purposes. For 2020, the gift tax exclusion for individual gifts is $15,000. So, a couple with two children could gift $60,000 ($15,000 each for two children) without gift tax consequences.12

There may also be benefits to making larger contributions. When a donor makes “…a contribution of between $15,000 and $75,000 for a beneficiary, you can elect to treat the contribution as made over a five calendar-year period for gift tax purposes. This allows you to utilize as much as $75,000 in annual exclusions to shelter a larger contribution. The money (and the growth of your account) gets out of your estate faster than if you made contributions each year,” reported Saving for College.12

    • 529 ABLE accounts. The 2014 ABLE Act makes it possible for Americans with disabilities, that were identified (before they reached age 26) and their families, to set aside savings in tax-deferred accounts. The money can be used as a supplement to private insurance and public benefits.13  ABLE accounts are similar to 529 education savings accounts in that the annual contribution often is determined by the maximum annual gift tax exclusion. However, when an account reaches $100,000 the beneficiary may no longer be eligible for Social Security Disability benefits.14

When it comes to investing, it’s not how much you earn that matters. It’s how much you keep. If you would like to learn more about tax-advantaged investment opportunities, get in touch.

*The Tax Foundation calculations include payroll taxes paid by employers because “…economists generally agree that the burden of both sides of the payroll tax falls on workers.”

Sources:

1 https://taxfoundation.org/us-tax-burden-on-labor-2020/

2 https://www.fidelity.com/building-savings/learn-about-iras/what-is-an-ira

3 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

4 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

5 https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500

6 https://www.irs.gov/retirement-plans/how-much-can-i-contribute-to-my-self-employed-sep-plan-if-i-participate-in-my-employers-simple-ira-plan

7 https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps

8 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

9 https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/

10 https://www.irs.gov/pub/irs-pdf/p969.pdf

11 https://www.savingforcollege.com/intro-to-529s/name-the-top-7-benefits-of-529-plans

12 https://www.savingforcollege.com/intro-to-529s/are-there-gift-and-estate-tax-benefits-for-529-plans

13 https://www.irs.gov/pub/irs-pdf/p907.pdf

14 https://www.ablenrc.org/what-is-able/what-are-able-acounts/

This material was prepared by Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer or firm.

In general, a distribution from a Roth IRA is tax-free and penalty-free, as long as the account has been open for five years and the account owner is age 59½, has become disabled, is making a qualified first-time home purchase ($10,000 lifetime limit), or dies. Minimum required distributions do not apply to the original account owner, although they may apply to heirs.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

Before investing in an ABLE plan, consider whether your state offers an ABLE program that provides residents with favorable state tax benefits. ABLE accounts may be protected from creditors if you invest in your own state’s program, depending on the state.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax professional.

Election Charts You Need To See

By LPL Research

One of the top requests we’ve had here at LPL Research is for more charts on the election. Over the next week, we will share some of our favorite charts on this very important subject.

Here’s how the S&P 500 Index performs under various presidents and congressional makeups. The best scenario has historically been a Democratic president and Republican Congress, while a Republican president and Democratic Congress has been the weakest.

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Building on this, a split Congress historically has been one of the best scenarios for investors.

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The best scenario under a Republican president is a split Congress, a potential positive for 2020 that has played out after the massive reversal in the stock market since March.

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Looking at the four-year presidential cycle shows that stocks haven’t been down during a year the president was up for a re-election since FDR in the 1940s, another bullish tailwind for 2020.

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Here’s another look at this, as stocks historically have done much better when there isn’t a lame-duck president.

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How stocks perform three months before the election has a stellar track record of predicting who will win in November. If stocks are higher, the incumbent party tends to win, while if stocks are lower, the incumbent party tends to lose. This indicator accurately predicted the winner 87% of the time (20 of 23) since the late 1920s.

View enlarged chart.

Building on this, if President Donald Trump is going to win, right about now is when the S&P 500 Index should start to outperform. Of course, if it weakens, it could mean we will be looking at a President Joe Biden soon.

View enlarged chart.

Speaking of presidents up for re-election, here’s what the S&P 500 historically has done during re-election years.

View enlarged chart.

Lastly, here are two final charts that may help forecast the outcome.

If real per capita disposable income is higher, the incumbent president usually wins. Conversely, if wages are weak, that bodes well for someone new in the White House. Given real per capita, disposable income is up more than 7% this year, it would suggest President Trump should take more than 70% of the votes. Of course, this is greatly skewed due to the CARES Act, so we’d put a major asterisk next to this one.

View enlarged chart.

To sum up, Gallup poll approval ratings have done a nice job of predicting how many votes a president up for re-election might get. With a 42% Gallup approval rating currently, this comes out to 49% of the total votes for President Trump, which points to a close race.

For more of our thoughts on the election, please watch our latest LPL Market Signals podcast below.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

College Loan Confusion

College Loan Confusion

College students have steep learning curves. In high school, they were tasked with doing well academically, participating in extracurricular activities, complying with the rules of their parents’ homes and, possibly, having a job. At college, they must decide what to study, how many credits to take, and other important decisions, while adapting to a new environment and learning to manage time, communicate with professors and administrators, network with peers, and manage finances.

Borrowing for college

A key aspect of finances for many college students is student loans. When scholarships, grants, income, and savings are not enough to cover the cost, students often borrow to pay for college. In fact, student loan debt just became the second highest consumer debt category, passing credit cards but still lagging mortgages.1 In 2020, student debt passed over $1.56 trillion. As part of the Covid-19, relief the government passed numerous student relief programs, but student loan debt continues to grow as the average student loan debt of the 2018 graduating class was roughly $29,200.1 On average, student loan debt in the United States tops out at $32,731, with roughly 10.8 percent in delinquency or default. 1

At graduation, accumulated debt may include:2

  • Direct subsidized loans (the government pays interest while students are in school)
  • Direct unsubsidized loans (students owe interest while in school)
  • Direct PLUS loans (for parents and graduate students)
  • Perkins loans
  • State and private loans (usually co-signed with an adult)

Different types of loans offer different interest rates and repayment schedules. The federal government finances some loans. Private lenders finance others. Some loans are need-based, while others are not.2 One option available now is to consolidate student loans on the private market. Companies have emerged offering lower rates to borrowers, but this comes with tradeoffs like giving up certain federal protections.

Many students don’t know much about their loans

There are a lot of details to understand and track when students borrow. That’s one reason many colleges and universities require student borrowers to attend loan counseling sessions before receiving loans.3 Unfortunately, the survey found few students retain much of the information presented:1

  • 94 percent of students did not know their repayment terms
  • 93 percent were uncertain what type of loan they held
  • 92 percent did not know their current loan interest rates
  • 75 percent understood how interest rates work

 

A Brookings Institute study found about one-half of students underestimate the amount of debt they have and one-third cannot provide an accurate estimate of their debt. The survey concluded:4

“It is clear from the analysis presented here that enrolled college students do not have a firm grasp on their financial positions, including both the price they are paying for matriculation and the debt they are accruing. Without this information, it’s unlikely that students will be able to make savvy decisions regarding enrollment, major selection, persistence, and employment. Without knowledge of their financial circumstances, a student with a large sum of debt might be unprepared to compete for the jobs that would pay generously enough to allow them to repay their debt without having to enter an income-based repayment program.”

The confusion carries into repayment options

Unfortunately, student loan confusion doesn’t end with college. In large part, that’s because there a multitude of repayment options for college graduates. The Department of Education’s Federal Student Aid website offers an overview of the eight repayment options for Direct Loans and Federal Family Education Loans. These include:5

  • Standard repayment plan (fixed payments)
  • Graduated repayment plan (increasing payments)
  • Extended repayment plan (fixed payments over 25 years)
  • Income-based Repayment Plan (income-based repayment)
  • Income Contingent Repayment (income-based repayment)
  • Income Sensitive Repayment Plan (income-based repayment)
  • Pay As You Earn Repayment Plan (income-based repayment)
  • Revised Pay As You Earn Repayment Plan (revised income-based repayment)

Of course, the choices available for repaying private student loans are different and vary by lender. In addition, marketplace and peer-to-peer lending platforms make it possible to refinance and consolidate student loan debt, sometimes at lower interest rates.6

Tax implications may also play a role into loan repayment decisions. Interest paid on student loan debt may be tax deductible. Earlier this year, Forbes suggested it could reduce taxable income by as much as $2,500 for some Americans. However, this article cautioned monthly loan payments could limit the ability of many young Americans to save for financial goals like starting a business, buying a home, or retiring from work at a reasonable age.7

Is borrowing for college worth it?

A college degree is almost a necessity today. Pew Research Center has reported, “On virtually every measure of economic well-being and career attainment – from personal earnings to job satisfaction…young college graduates are outperforming their peers with less education.”8

When a degree confers so many benefits, borrowing to pay for college appears to be a reasonable choice as long as students make sound repayment choices. In a world where so many repayment options are available, graduates may want to work with financial professionals to accurately determine which repayment programs may be the most beneficial.

Sources:

1 https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#27cd9672281f

2 https://bigfuture.collegeboard.org/pay-for-college/loans/types-of-college-loans

3 https://studentloans.gov/myDirectLoan/index.action

4 http://www.brookings.edu/~/media/research/files/reports/2014/12/10-borrowing-blindly/are-college-students-borrowing-blindly_dec-2014.pdf (Pages 1 and 10)

5 https://studentaid.ed.gov/sa/repay-loans/understand/plans#direct-and-ffel

6 http://www.business.com/finance/finance-meet-your-new-match-fintech-trends-to-watch-in-2016/

7 http://www.forbes.com/sites/stephendash/2016/03/04/long-term-tax-strategies-for-student-loan-borrowers/#4360b54b443f (or go to https://s3-us-west-2.amazonaws.com/peakcontent/Peak+Documents/Forbes-Long-Term_Tax_Strategies_for_Student_Loan_Borrowers-Footnote_7.pdf)

8 http://www.pewsocialtrends.org/2014/02/11/the-rising-cost-of-not-going-to-college/

LPL Market Signals Podcast Presidential Election

What May Happen If Biden Wins?

LPL Financial’s Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss the impacts of a potential Joe Biden victory. “Of course tensions are high as we head closer to the election, but don’t forget that stocks tend to do just fine, regardless of who is in the White House, as long as the economy is firm,” according to Ryan. “With many parts of the economic data showing continued improvement, there’s a good shot the economy will be on the upswing as we head into 2021.”

They also discuss:

  • Why new highs tend to lead to more new highs
  • Will a Biden win bring with it much higher taxes and regulation?
  • The latest with Ryan’s Volvo drama
  • What worries are creeping up

You can watch the full discussion below, direct from our YouTube channel.

What Happens If Trump Wins? 

LPL Financial’s Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss the impacts of a potential President Trump second term.

They also discuss:

  • The historic August bounce
  • Can the strength continue in the usually weak September
  • The economy improving
  • Our favorite Warren Buffett quotes 

    You can watch the full discussion below, direct from our YouTube channel.

     

    IMPORTANT DISCLOSURES

    This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

    References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

    Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

    All index and market data from FactSet and MarketWatch.

    This Research material was prepared by LPL Financial, LLC.

    Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

    Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

    • Not Insured by FDIC/NCUA or Any Other Government Agency
    • Not Bank/Credit Union Guaranteed
    • Not Bank/Credit Union Deposits or Obligations
    • May Lose Value

Should I Retire Early?

Americans are choosing to retire early.

Economists Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber associated with the National Bureau of Economic Research (NBER) have been comparing data gathered in January and April 2020 to learn how labor markets were affected by the crisis.1

They shared their work in Labor Markets During the COVID-19 Crisis: A Preliminary View. The economists reported the employment-to-population ratio declined sharply from January to early April. In January, 60 percent of Americans participating in a survey were working. By early April, that number had declined to 52.2 percent. The authors explained:1

“…this decline in employment is enormous by historical standards and is larger than the entire decline in the employment to population ratio experienced during the Great Recession…

…we see a large increase in those who claim to be retired, going from 53 percent to 60 percent. This makes early retirement a major force in accounting for the decline in the labor-force participation…

…for each part of the age distribution, a larger fraction of the survey population now claims being retired. Hence, even for those that are well before retirement age, we see a large increase in early retirement. Moreover, a notable jump in the difference occurs at age 66 which is the first year people can claim retirement benefits without penalty from the Social Security Administration (SSA).”

Some issues to consider

It’s not difficult to understand why Americans are considering or pursuing early retirement. During the past few months, many have become comfortable at home. In addition, the risks associated with many types of work in the midst of the COVID-19 pandemic are unappealing. It’s possible companies, which are offering early retirement packages to reduce overhead, also contribute to the decision.

Before deciding to retire early, anyone contemplating that course of action should carefully consider these issues:

  1. How much will health insurance cost? For anyone too young to be eligible for Medicare, health insurance is a serious concern, especially during a pandemic. Options available to younger Americans include:
  • A spouse’s employer-sponsored plan. People with employed spouses may have the option to participate in their partners’ employer-sponsored health plan.
  • Federal Health Exchanges. Open enrollment for 2020 is over, but people who are newly out-of-work may qualify for a special enrollment period.2
  • Continuation of health coverage. The federal government requires companies with 20 or more employees to offer health coverage identical to that offered to an employee while employed. This option, known as COBRA, can be quite expensive.3
  1. How much income will Social Security benefits provide? Anyone who was born after 1960 has a full retirement age of 67. It is possible to claim Social Security benefits early though, after age 62. Early claimants typically receive lower monthly benefits. For example, a person who would have received $1,000 a month (full retirement benefit) at age 67 and decides to retire at age 62, may receive $700 a month, reports the Social Security Administration.4
  2. How much income will your savings generate? It’s important to assess how much income your retirement and other savings will provide if you retire early. Sources of retirement income may include benefits from pension plans, distributions from 401(k) plan and IRA accounts, withdrawals from non-qualified savings accounts, and income from Social Security benefits. Some people have other sources of income as well.

If you need help deciding how much income to safely withdraw so you don’t run out of money during retirement, or you’re uncertain which accounts to tap into first, get in touch with a financial professional.

  1. Can you take withdrawals without owing a penalty tax? When people take distributions from 401(k) plan accounts, IRAs, and other qualified savings plans before age 59½, they may owe penalty taxes – and that can lower the amount of income their savings will generate over the long term.

The CARES Act made it possible for plan sponsors to loosen these restrictions temporarily. As a result, retirees who are younger than full retirement age may be able to take distributions without paying penalty taxes for a limited period of time.5

Contributions to Roth IRAs may be withdrawn at any time tax-free and penalty-free at any time, as long as certain requirements are met. However, when earnings are distributed before age 59½, taxes and penalties may be owed.6

  1. How much tax will be owed each year during retirement? The amount of tax owed may vary from year-to-year depending on the distribution strategy adopted. Also, the amount of income taken each year may affect the tax status of Social Security benefits.7
  2. What does the company’s early retirement package offer? If your company offers an early retirement package, evaluate it carefully. Be certain you understand exactly what is included. The possibilities include:8, 9
  • Severance pay
  • Salary continuation
  • Bridging payment
  • Pension lump sum payout
  • Health insurance coverage
  • Life or disability insurance coverage
  • Any accrued vacation
  • Any unused sick leave
  • Outplacement services

In addition, ask about the consequences of not accepting the package. If your company is in financial straits and early retirement is an effort to remain solvent, it’s possible you may experience a layoff with less generous benefits in the future.8

If you think early retirement may be the right choice for you, let us know. We’ll help analyze your Social Security and Medicare options so you may make an informed decision. We can also help you understand investment, cash flow, and tax planning choices, so you are confident about your retirement decision.

Sources:

1 https://poseidon01.ssrn.com/delivery.php?ID=707091125114113026100091122106011077118020024084061089000004119106020064002075099096026057102032006102108123122117122086106009038034045078021109101121110068091120095081028071014073002027081087000007024022067125108106092096116119127027116119011017105&EXT=pdf (or go to https://peakcontent.s3-us-west-2.amazonaws.com/Peak+Documents/Sep_2020_SSRN-Labor_Markets_During_the_COVID-19_Crisis-A_Preliminary_View-Footnote_1.pdf)

2 https://www.healthcare.gov/coverage-outside-open-enrollment/special-enrollment-period/

3 https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/cobra-continuation-health-coverage-consumer.pdf

4 https://www.ssa.gov/benefits/retirement/planner/agereduction.html

5 https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

6 https://www.irs.gov/publications/p590b#en_US_2019_publink1000231057

7 https://turbotax.intuit.com/tax-tips/retirement/tax-strategies-for-an-early-retirement/L6U8FKvbN

8 https://money.usnews.com/money/retirement/articles/how-to-evaluate-an-early-retirement-offer

9 https://www.investopedia.com/articles/financial-advisors/090915/should-you-accept-early-retirement-offer.asp

This material was prepared with Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer or firm.